An annuity is a contract between you and an insurance company designed to achieve retirement and other long term goals. The value of an annuity contract is determined by the premiums paid, less any applicable charges, plus interest credited.
The most common type of annuity is a fixed deferred annuity. A deferred annuity has two parts. The accumulation phase where premiums paid into the contract earn interest. The earnings of the contract grow tax deferred as long you leave them in the annuity. During the second phase, the payout phase, the insurance company makes a lump sum or a series of guaranteed payments.
Advantages of annuities
- minimum guaranteed rate - your contract has a stated minimum interest rate your money can earn
- tax deferral - under current federal law, your earnings are not taxed as long as they remain in the annuity
- payout options - insurance companies may offer several guaranteed payout options only an annuity can provide
Additional types of annuities
Fixed Index Annuity
-The fixed index annuity (also referred to as an Equity-Indexed Annuity) is a fixed annuity that earns interest based on the performance of indices such as the S&P 500 index. Fixed index annuities, like traditional annuities provide a guaranteed minimum interest rate. Regardless of the performance of the index, the value of your contract will not drop below a guaranteed minimum.
-An immediate annuity provides an income stream no later than one year from when the premium payment is made. Typically only one premium payment is used to fund an immediate annuity. There are several payout options available including payments for a certain period, payments for life, and certain and life.
Other items of consideration
-Early withdrawal or surrender charges
a penalty for accessing your money during the accumulation phase. Most annuities will contain a free withdrawal privilege where a limited amount of money may be withdrawn penalty free during the accumulation period
The most common death benefit is the contract value or the premiums paid, whichever is larger.
Other charges, if any, may apply, including contract fees, premium charges, and state premium taxes